Customizing Core Quant Strategies

20-02-2017 | Insight

Robeco’s Core Quant equity strategies exploit Value, Quality and Momentum factor premiums, combined within a transparent portfolio algorithm designed to consistently outperform the market. But what if an investor is interested in a portfolio solely focused on the European stock market? Or what if that client is also looking for a way to reduce the carbon footprint of their investments?

Wilma

de Groot

CFA, Director, Portfolio Manager

To address these issues, Robeco enables investors to adjust their strategies according to a series of parameters. This feature is not new but it has become increasingly popular over time. “We offered the possibility to customize our strategies from the very beginning in 2002,” says Wilma de Groot, a portfolio manager of Robeco’s Quant Equities team. “However, we’ve definitely seen a growing number of specific requests from clients in recent years.”

For almost 15 years, Robeco has designed custom-made quant strategies, in close cooperation with its clients. Our proprietary portfolio Customizing Core Quant Strategies algorithm features a flexible set-up, so we can easily adapt to a variety of individual requirements. Based on this experience, we highlight three main areas of possible customization: the investable universe, the risk-return profile and the integration of sustainability criteria.

Defining a precise pool of investable stocks is certainly the most obvious way to adjust a portfolio to a specific need. Core Quant strategies can be applied to a variety of universes, as long as these remain broad enough to enable capturing factor premiums. As a result, portfolios can easily be geared to a particular geographical region or a certain group of business sectors, for example.

Adjustable risk-return profile

But the customization of our Core Quant strategies can go well beyond the definition of a restricted investment pool. By allowing a long only portfolio to deviate more or less from its benchmark, its expected tracking error can also be adjusted by between 0.5% and 5%.

Portfolios with tracking errors up to 1.5 percentage points are very good substitutes to passive strategies, as they aim to generate at least market like returns. “This is particularly relevant for investors looking for alternatives to passive strategies, which inevitably underperform the market once trading costs are taken into account,” says De Groot.

Portfolios with greater tracking error flexibility are more suitable for clients who aim to capture more of the factor premiums in a consistent way. Our research shows that the looser the tracking error criteria, the higher the expected returns tend to be.

We can implement stricter sustainability standards without losing too much factor exposure

Flexible sustainability integration

Another area of customization is sustainability. All of Robeco’s quantitative equity strategies integrate ESG scores, based on RobecoSAM’s annual Corporate Sustainability Assessments. For all portfolios, we ensure ESG scores are at least higher than the benchmark’s own score.

Moreover, all our funds comply with Robeco’s general exclusion policy. But this is just a starting point. Depending on their own preferences, investors can request stricter criteria. This can be done, for example, through the use of client-specific exclusion lists. Targeting precise objectives, such as reducing carbon footprints is also possible.

Tighter investment rules and smaller stock pools obviously have an impact on a portfolio’s exposure to factors premiums. However, this relationship is not linear because our approach to sustainability ensures that we prioritize the selection of sustainable stocks with the best possible momentum and valuation characteristics. “That’s why we can implement stricter sustainability standards without losing too much exposure to factor premiums,” says De Groot.

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